Debt remains a word shrouded with negative connotations. And despite how commonplace it is, people are still strangely reluctant to talk about it openly.
In reality, debt should not be seen as a bad thing. It is a vital financial instrument for enabling people to achieve major life goals and lead the lifestyles they want.
And yet our failure to discuss the subject and take a proactive approach in educating people about how to accrue debt responsibly could have serious, damaging consequences.
A few recent statistics offer some insight into the UK public’s love-hate relationship with debt.
Excluding mortgages, the Trades Union Congress calculated that unsecured household debt in the UK peaked in 2018, reaching a total of £428bn, or £15,385 per household.
There are plenty of reasons for this; stagnating wage growth has made the cost of living more expensive, and there seems to be a greater reliance placed on debt as a means of paying off smaller, daily transactions.
To delve further into the matter, KnowYourMoney surveyed over 2,000 UK adults to see which forms of debt were the most common for UK consumers, their overall awareness of financial instruments to help stay on top of their finances, and how poorly-managed debt was impacting their lives.
There we several notable findings. Over 62 per cent of people had some form of debt, with credit cards (35 per cent), mortgages (24 per cent) and students loans (11 per cent) ranking as the most common forms.
Yet perhaps most startling, of those in debt, nearly 29 per cent said they both don’t feel in control of their debt and have no plan for how they will pay it off, while 67 per cent also said they don’t have any savings to pay off debt if required.
While we may be accepting of debt as a necessary part of our finances, this research shows how common it is for people to take on debt without properly considering how it will be managed. Needless to say, this is bad practice and ought to be addressed.
Safe and secure
As the second most common form of debt across the country, and typically the largest outgoing people have, mortgages exemplify the need to have a firm handle on your personal finances.
At present, it’s estimated that there are over 11.1m mortgages in the UK, valued at £1.3 trillion.
However, there are also 61 mortgage possession claims made every day as a result of borrowers not being able to keep up with their repayments.
The truth of the matter is that while lenders can conduct the necessary due diligence, only a borrower is able to understand the true nature of their personal finances and what they are able to manage in the long-term.
This goes for all types of debt – people need to be actively aware of their personal finances.
This may seem like an obvious point, but it is surprising how many of us are not aware of some of the readily available tools to help stay on top of debt. For instance, KnowYourMoney found that 44 per cent of UK adults don’t know what their debt-to-income ratio is, with 39 per cent admitting that they don’t even understand the term.
Calculated by dividing total recurring monthly debt by gross monthly income, DTI is just one example of how debt can be put into perspective. For almost half of people in debt across the UK not to be aware of their debt-to-income ratio is something both the private and public sector must work to fix.
Personal financial education has been thrown about as something sorely lacking in the UK’s education system. While ultimately responsible handling of finances lies with the individual, there’s clearly a case to be made for our schools and universities to step up and address the gaps in our knowledge.
Debt is a necessity for many, and should it be appropriately managed. There is no reason why it cannot form part of a healthy financial strategy.
However, we cannot overlook some of the more significant consequences of not staying on top of our personal finances, or failing to prepare for the future.
The distinction between good and bad debt is vital. The former is debt that can be managed and adds value to the borrower’s life, while the latter is either high-risk, unmanageable, or provides no value to the individual.
Mortgages, for example, are typically an example of good debt, provided the repayments can be met and savings are set aside in case of a change in financial circumstance. Acquiring debt to pay off existing debt, meanwhile, is an example of bad debt, and ought to be avoided.
Importantly, we must talk more openly about debt. At present, 41 per cent of people in debt don’t feel comfortable talking about the subject with friends or family, while a quarter also say that they regularly lose sleep over their personal finances.
Only by creating a dialogue about debt can we ensure people approach it responsibly.
Doing so will not only help consumers maintain a stronger grip on their personal finances, it will also prevent us from treating debt as a taboo subject.